IMF says global banks need $675 billion in capital

The world’s major banks may need $675 billion in fresh capital over the next several years to recover from a credit crisis that shows few signs of abating, the International Monetary Fund said.

In a report on the financial system, the Washington-based lender also raised it estimate of losses tied to US loans and securitised assets to $1.4 trillion, from an estimate of $1.3 trillion two weeks ago. In April, the IMF predicted the losses would total $945 billion.

“Strains afflicting the global financial system are expected to deepen the downturn in global growth and restrain the recovery,” the report said. “The risk of a more severe adverse feedback loop between the financial system and the broader economy represents a critical threat.”

The IMF urged countries to coordinate policy responses when necessary, use public funds to buttress troubled assets and ensure market interventions are temporary. The global credit crunch will top the agenda October 10 when finance ministers and central bankers gather for the IMF and World Bank's annual meetings in Washington.

Worldwide losses and writedowns since the beginning of 2007 have totaled $586.1 billion, less than capital raised totaling $433 billion. Financial companies beset with illiquid assets will need to raise more money from private or public sources, the IMF said.

‘Unprecedented’ Times: “This de-leveraging will require both increased capital and also the shedding of assets,” said Jaime Caruana, head of capital markets at the IMF, in a press conference. “In these unprecedented circumstances, the restoration of financial stability requires a decisive and internationally coherent set of policies.”

In the US, Treasury Secretary Henry Paulson this week is setting up a $700 billion bank-rescue office to purchase illiquid mortgage-related assets. Caruana said the US plan was in the “right direction”.

“The combination of mounting losses, falling asset prices and a deepening economic downturn, has caused serious doubts about the viability of a widening swath of the financial system,” the fund said. “With many financial institutions finding it much more difficult to raise private capital at the present time, the authorities may need to inject capital into viable institutions.”

Growth Projections: The research the IMF released today urged policy makers to help prevent “fire-sale liquidations that threaten to reduce bank capital”. The financial crisis will require “radical changes to banks' business models as many previous sources of revenue have nearly disappeared,” the report said.

Tomorrow the IMF will release updated projections for gross domestic product growth in the global economy.

The fund urged an overhaul of the London Interbank Offered Rate, the interest banks charge to borrow funds from each other. Libor climbed to 4.29 per cent earlier this week, the biggest premium over the Fed's benchmark since the central bank began using a target for overnight federal funds rate between banks as its main tool around 1990.

The fund called for temporary central bank support for the inter-bank market “aimed at restoring the functioning” of the system. In the longer term, the fund said that the calculation of Libor should include a larger sample of banks and also non-bank sources.

Emerging markets, which had until recently been resilient, are coming under increasing pressure, the fund said. “The cost and availability of financing have become more difficult,” the report said. “The scope for spillovers to emerging market equity markets has risen.”